Chapter 6 - Supply, Demand, and Government Policies
How Price Ceilings Affect Market Outcomes:
Price ceiling- a legal maximum on the price at which a good can be sold
Price floor- a legal minimum on the price at which a good can be sold
Buyers of any goods always want a lower price while sellers want a higher price
The interests of the two groups conflict
A few examples can be
Lines at the Gas pump because of shortage of gasoline due to prices raises
Rent control (in the long run and short run)
Landlords adjust rent but are still under the ceiling policy that was intended to help the poor by making housing more affordable. Economists claim it's inefficient.
More people search for housing over time while there are only a fixed number of apartments to rent.
How Price Floors Affect Market Outcomes:
Similar to price ceilings, price floors impact the sellers
They are unable to sell all they want at the market price
A few examples can be
Minimum wage
The lowest price for labor that any employer may pay
The quality of labor supplied exceeds the quantity demanded and this results in unemployment
The minimum wage raises the income of those who have jobs but lowers the incomes of those who cannot find jobs.
Evaluating Price Controls:
It is often aimed to assist the poor
But it can also hurt those who are trying to assist, sellers like landlords don’t benefit from it
How Taxes on Sellers Affect Market Outcomes:
Tax incidence- the manner in which the burden of a tax is shared among participants in a market
Because the tax doesn’t affect buyers, the quantity of ice cream demanded at any given price is the same. So the demand curve does not change
But sellers make less profit from their business so the supply curve changes.
Soon, market prices rise and buyers pay more than their previous price, making the buyers worse off and it converts tax to the government
How Taxes on Buyers Affect Market Outcomes:
The taxes impact the demand-supply
Not only do they have to pay tax to the government, they also have to pay taxes to the seller
Taxes levied on sellers and taxes levied on buyers are equivalent
The difference is who sends the money to the government
Can Congress Distribute the Burden of a Payroll Tax?:
Half of the tax is paid by firms, and half is deducted from workers’ paychecks
No, congress cannot distribute the burden of a payroll tax
Elasticity and Tax Incidence:
A tax burden falls more heavily on the side of the market that is less elastic
Elasticity measures the willingness of buyers or sellers to leave the market when conditions become unfavorable
The supply of labor is much less elastic than the demand
Workers rather than firms bear most of the burn of the payroll tax
That means that the distribution isn’t exactly 50-50 like lawmakers had intended
Who Pays the Luxury Tax:
Taxing luxuries seemed a logical way of taxing the rich since the rich are the ones who could afford extravagances such as yachts, private airplanes, jewelry, expensive cars, etc.
The goal of the tax was to raise revenue from those who could most easily afford to pay
But a millionaire can use the same money to possibly buy another house or take a trip instead.
This results in the supply of yachts being relatively inelastic
This means that with elastic demands and inelastic supplies, the burden of the tax falls largely on the suppliers rather than the rich
How Price Ceilings Affect Market Outcomes:
Price ceiling- a legal maximum on the price at which a good can be sold
Price floor- a legal minimum on the price at which a good can be sold
Buyers of any goods always want a lower price while sellers want a higher price
The interests of the two groups conflict
A few examples can be
Lines at the Gas pump because of shortage of gasoline due to prices raises
Rent control (in the long run and short run)
Landlords adjust rent but are still under the ceiling policy that was intended to help the poor by making housing more affordable. Economists claim it's inefficient.
More people search for housing over time while there are only a fixed number of apartments to rent.
How Price Floors Affect Market Outcomes:
Similar to price ceilings, price floors impact the sellers
They are unable to sell all they want at the market price
A few examples can be
Minimum wage
The lowest price for labor that any employer may pay
The quality of labor supplied exceeds the quantity demanded and this results in unemployment
The minimum wage raises the income of those who have jobs but lowers the incomes of those who cannot find jobs.
Evaluating Price Controls:
It is often aimed to assist the poor
But it can also hurt those who are trying to assist, sellers like landlords don’t benefit from it
How Taxes on Sellers Affect Market Outcomes:
Tax incidence- the manner in which the burden of a tax is shared among participants in a market
Because the tax doesn’t affect buyers, the quantity of ice cream demanded at any given price is the same. So the demand curve does not change
But sellers make less profit from their business so the supply curve changes.
Soon, market prices rise and buyers pay more than their previous price, making the buyers worse off and it converts tax to the government
How Taxes on Buyers Affect Market Outcomes:
The taxes impact the demand-supply
Not only do they have to pay tax to the government, they also have to pay taxes to the seller
Taxes levied on sellers and taxes levied on buyers are equivalent
The difference is who sends the money to the government
Can Congress Distribute the Burden of a Payroll Tax?:
Half of the tax is paid by firms, and half is deducted from workers’ paychecks
No, congress cannot distribute the burden of a payroll tax
Elasticity and Tax Incidence:
A tax burden falls more heavily on the side of the market that is less elastic
Elasticity measures the willingness of buyers or sellers to leave the market when conditions become unfavorable
The supply of labor is much less elastic than the demand
Workers rather than firms bear most of the burn of the payroll tax
That means that the distribution isn’t exactly 50-50 like lawmakers had intended
Who Pays the Luxury Tax:
Taxing luxuries seemed a logical way of taxing the rich since the rich are the ones who could afford extravagances such as yachts, private airplanes, jewelry, expensive cars, etc.
The goal of the tax was to raise revenue from those who could most easily afford to pay
But a millionaire can use the same money to possibly buy another house or take a trip instead.
This results in the supply of yachts being relatively inelastic
This means that with elastic demands and inelastic supplies, the burden of the tax falls largely on the suppliers rather than the rich
